Decreasing demand and increasing supply causes mortgage rates to rise

Congratulations to the Philadelphia Eagles who won their very first Super Bowl Championship yesterday.  As for the Patriots, do you know the difference between a New England fan and a carp?  Answer: One is a bottom-feeding, scum sucker, and the other is a fish.

Mortgage rates continue to march higher.  I know this may seem repetitive but it’s not like we didn’t see this coming (see HERE, HERE, and HERE).

Supply & Demand

The basic concept of supply and demand can explain why we’re witnessing home loan rates rising.  Rates are effectively determined by the price of mortgage-backed bonds (MBS’s).  When the price of bonds fall then mortgage rates rise and vice versa.

The Federal Reserve

Starting in 2017 the Fed began to unwind the balance sheet which they accrued during the aftermath of the housing crash.  The Fed had been investing billions of dollars per month into the fixed income market including MBS’s.  In the absence of the Fed’s investment demand for MBS’s has declined pushing prices down and yields up.

European Central Bank

The US central bank was not the only entity dumping money into quantitative easing (QE) measures following the recession.  The European Central Bank followed the US’s lead and became a major investor in the European fixed income market.  They recently discontinued their QE and that has also drawn demand away from the US further pressuring prices down and yields up.

Higher deficits

Not only is demand for fixed income securities declining but the US government will be increasing the supply of US Treasury notes and bonds in the coming years in order to fund the recently passed tax cuts.  Should congress and the president also sign an infrastructure bill into law we could expect to see higher deficits and a greater supply of fixed income securities competing with MBS’s.

The bottom line is that we are in an environment where the demand for MBS’s has declined and the supply of competing debt securities is increasing.  As a result yields are rising.

I expect this trend to continue in the immediate term.  I think mortgage rates will worsen by another .125%-.25% before stabilizing.

Current Outlook: locking